Apr 27, 2009

How to Value a Business Quickly

Before you decide to make an offer on a business for sale, it's important to know how businesses are valued in given industries.

Obviously, each business is unique, and there are often hidden assets inside each business that make it worth more than any standard rules of thumb applied to, for example, it's earnings, or it's revenue or inventory. Realize too that some businesses aren't worth their salt, and should be avoided completely, even if the owner handed the entire business over to you for free - a lot of them are nothing but headaches looking for new blood to suck life and energy.

I'd estimate over half the businesses for sale on the current market (small businesses worth less than $1 Million) are completely worthless - most of these businesses you'd be buying are dead-end jobs, with limited to zero growth prospects. Stay away from these like you would a deadly virus. Regardless of how attractive the multiple appears against a business for sale - you've got to truly understand your strengths, weaknesses, and how your talents applied to the business will help it, and you, to grow. You've also got to understand the business itself, and approach it like you would any other investment: with lots of due diligence.

With that in mind, here are a few rules of thumb to consider before putting in an offer to purchase a company. And as with anything, if you find a business for sale that is WAY off the mark, and is priced at 2-3x or more what it should be based on the multiple below it's very probable that the business isn't really for sale at all. Rather, the would-be seller is shopping for suckers. I'd estimate that over 25% of the businesses for sale on the market, aren't realistically looking for buyers, because the math simply doesn't work out for a prospect buyer. I prefer buying businesses where the asking price falls within reason, and is obvious priced based on some type of realistic multiple.